Japan’s Output Drops Most Since 2011 as Consumers Spend Less

A customer looks at bags on display at a store in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

July 30 (Bloomberg) -- Japanese industrial output fell the
most since the March 2011 earthquake, highlighting the widening
impact to the economy of April’s sales-tax increase.

Industrial output dropped 3.3 percent in June from May, the
trade ministry said today in Tokyo, more than twice the median
forecast for a 1.2 percent contraction in a Bloomberg News
survey of 31 economists.

The manufacturing sector has cut back in response to a
slump in consumer spending and a failure of exports to pick up
even after an 18 percent drop in the yen last year. Honda Motor
Co. and Nissan Motor Co. this week reported jumps in profit,
showing how the weaker currency is contributing to earnings
gains without bolstering the economy.

“Today’s data are very ugly - companies are becoming even
more cautious on the outlook for the economy after the sales-tax
hike,” said Taro Saito, director of economic research at NLI
Research Institute in Tokyo. “Japan’s economy doesn’t have a
driving force, with consumer spending and exports having
stalled.”

The yen was little changed after the output data, trading
at 102.13 against the dollar at 12:11 p.m. in Tokyo. The
Japanese currency has climbed about 3 percent this year after
its 18 percent drop in 2013. The Topix index was up 0.1 percent
in morning trading after closing at a six-month high yesterday.

Mobile Phones

In a contrast to Japan, South Korea’s industrial production
surged 2.9 percent in June from the previous month, the most
since September 2009, on demand for semiconductors used in
mobile devices, Statistics Korea said today. That was stronger
than a median forecast for a 1.2 percent gain in a Bloomberg
survey of economists.

Japanese production fell across most sectors, with
transport equipment, which includes automobiles, dropping 3.4
percent from the previous month, and output of desktop
computers, mobile phones and other communications equipment
sliding 9 percent.

Domestic demand, which had compensated for weak exports,
fell off from April, and inventories rose in May as companies
didn’t slow production much, contributing to the June output
cut, according to Yasushi Ishizuka, a director in the trade
ministry statistics department.

Rising Inventories

The ministry cut its assessment of production for the first
time since September 2012, saying that output is weakening.

Shipments tumbled for a fifth straight month, helping to
push up inventories, which rose to the highest since November
2012. The ratio of inventories-to-shipments jumped to the
highest since March 2012, showing that companies built up more
stock than demand warranted.

The rise in inventories points to prolonged weakness in
Japanese manufacturing activity, Izumi Devalier, a Japan
economist at HSBC Holdings Plc in Hong Kong, wrote in an e-mailed note.

While manufacturers surveyed by the ministry forecast a
recovery in output in the coming months, these should be treated
with caution as companies tend to overestimate future
production, according to a research note from economists at
Capital Economics.

Output will rise 2.5 percent in July from a month earlier,
and 1.1 percent in August, according to today’s data. Any
recovery in production in the coming months will likely be slow,
Capital Economics wrote.

Honda, Japan’s third-largest carmaker, raised its profit
forecast to the highest in seven years earlier this week as the
yen weakens and new models boost sales in emerging markets.
Nissan reported a 37 percent profit jump on rising demand in
China and the U.S.

Slumping Spending

A weak rebound in the economy from an estimated contraction
in the second quarter could complicate Prime Minister Shinzo
Abe’s plans to lift the sales levy again in 2015. Finance
Minister Taro Aso said yesterday the government would make a
decision by the end of the year whether to raise the levy to 10
percent from 8 percent now.

Consumers reacted to April’s 3 percentage point increase in
the tax by cutting spending, with retail sales falling more than
expected in June, and household spending dropping for a third
month, according to data released yesterday. Retail sales
dropped 7 percent in the second quarter from the January-March
period.

Exports have been weak, dropping more than forecast in May
and unexpectedly falling in June.

The economy is estimated to have contracted an annualized
5.2 percent in the April-June period, and will grow 2.4 percent
this quarter, according to a Bloomberg survey of economists.